- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________.
Commission File Number: 1-8944
CLEVELAND-CLIFFS INC
(Exact name of registrant as specified in its charter)
Ohio 34-1464672
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
1100 Superior Avenue, Cleveland, Ohio 44114-2589
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 694-5700
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
As of October 30, 1998, there were 11,148,453 Common Shares (par value $1.00 per
share) outstanding.
================================================================================
PART I - FINANCIAL INFORMATION
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED INCOME
(In Millions, Except Per Share Amounts)
-----------------------------------------------------
Three Months Nine Months
Ended September 30 Ended September 30
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
REVENUES
- --------
Product sales and services $ 158.1 $ 133.1 $ 328.5 $ 256.3
Royalties and management fees 15.5 13.7 36.8 34.4
---------- ---------- ---------- ----------
Total Operating Revenues 173.6 146.8 365.3 290.7
Investment income (securities) 1.5 1.0 3.7 4.4
Recovery of excess closedown provision - - - 4.3
Other income 0.6 1.1 2.4 2.9
---------- ---------- ---------- ----------
TOTAL REVENUES 175.7 148.9 371.4 302.3
COSTS AND EXPENSES
- ------------------
Cost of goods sold and operating expenses 140.6 118.3 297.9 235.4
Administrative, selling and general expenses 3.4 5.4 13.0 12.6
Interest expense 0.1 0.5 0.4 2.2
Other expenses 4.4 1.6 9.4 5.1
---------- ---------- ---------- ----------
TOTAL COSTS AND EXPENSES 148.5 125.8 320.7 255.3
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 27.2 23.1 50.7 47.0
INCOME TAXES
Currently payable 4.1 8.0 7.6 11.3
Deferred 3.0 (6.0) 5.6 (1.3)
---------- ---------- ---------- ----------
TOTAL INCOME TAXES 7.1 2.0 13.2 10.0
---------- ---------- ---------- ----------
NET INCOME $ 20.1 $ 21.1 $ 37.5 $ 37.0
========== ========== ========== ==========
NET INCOME PER COMMON SHARE
- ---------------------------
Basic $ 1.80 $ 1.86 $ 3.33 $ 3.26
Diluted $ 1.78 $ 1.85 $ 3.30 $ 3.24
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
- ---------------------------------------
Basic 11,207 11,379 11,286 11,375
Diluted 11,264 11,484 11,363 11,443
See notes to financial statements
2
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(In Millions)
-------------------------
September 30 December 31
1998 1997
---------- ----------
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 115.5 $ 115.9
Accounts receivable - net 68.9 73.4
Inventories
Finished products 41.3 46.3
Supplies 13.4 15.1
---------- ----------
54.7 61.4
Federal income taxes 7.7 7.5
Other 7.3 7.6
---------- ----------
TOTAL CURRENT ASSETS 254.1 265.8
PROPERTIES 205.9 272.3
Allowances for depreciation and depletion (59.9) (138.3)
---------- ----------
TOTAL PROPERTIES 146.0 134.0
INVESTMENTS IN ASSOCIATED COMPANIES 225.8 218.3
OTHER ASSETS
Prepaid pensions 41.8 40.4
Other 34.9 35.8
---------- ----------
TOTAL OTHER ASSETS 76.7 76.2
---------- ----------
TOTAL ASSETS $ 702.6 $ 694.3
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES $ 87.0 $ 91.8
LONG-TERM OBLIGATIONS 70.0 70.0
POSTEMPLOYMENT BENEFIT LIABILITIES 69.8 70.1
OTHER LIABILITIES 55.1 55.0
SHAREHOLDERS' EQUITY
Preferred Stock
Class A - no par value
Authorized - 500,000 shares; Issued - none - -
Class B - no par value
Authorized - 4,000,000 shares; Issued - none - -
Common Shares - par value $1 a share
Authorized - 28,000,000 shares;
Issued - 16,827,941 shares 16.8 16.8
Capital in excess of par value of shares 69.3 69.8
Retained income 497.5 472.1
Accumulated other comprehensive loss, net of tax (4.1) (2.0)
Cost of 5,679,488 Common Shares in treasury
(1997 - 5,519,027 shares) (155.8) (146.2)
Unearned compensation (3.0) (3.1)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 420.7 407.4
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 702.6 $ 694.3
========== ==========
See notes to financial statements
3
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions,
Brackets Indicate
Cash Decrease)
Nine Months Ended
September 30
-------------------------
1998 1997
---------- ----------
OPERATING ACTIVITIES
Net income $ 37.5 $ 37.0
Depreciation and amortization:
Consolidated 6.4 5.2
Share of associated companies 9.4 9.1
Decrease in Savage River closedown reserve - (16.1)
Provision for deferred income taxes 5.6 9.2
Tax credit - (5.6)
Other (1.7) 3.0
---------- ----------
Total before changes in operating assets and liabilities 57.2 41.8
Changes in operating assets and liabilities 2.4 (51.1)
---------- ----------
NET CASH FROM (USED BY) OPERATING ACTIVITIES 59.6 (9.3)
INVESTING ACTIVITIES
Purchase of property, plant and equipment:
Consolidated (18.8) (11.0)
Share of associated companies (18.9) (35.7)
Purchase of Wabush interest - (15.0)
Other 1.3 4.8
---------- ----------
NET CASH (USED BY) INVESTING ACTIVITIES (36.4) (56.9)
FINANCING ACTIVITIES
Dividends (12.1) (11.1)
Repurchases of Common Shares (11.5) (1.7)
---------- ----------
NET CASH (USED BY) FINANCING ACTIVITIES (23.6) (12.8)
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (0.4) (79.0)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 115.9 165.4
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 115.5 $ 86.4
========== ==========
See notes to financial statements
4
CLEVELAND-CLIFFS INC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and should be read in conjunction
with the financial statement footnotes and other information in the Company's
1997 Annual Report on Form 10-K. In management's opinion, the quarterly
unaudited financial statements present fairly the Company's financial position
and results in accordance with generally accepted accounting principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
References to the "Company" mean Cleveland-Cliffs Inc and
consolidated subsidiaries, unless otherwise indicated. Quarterly results are not
representative of annual results due to seasonal and other factors. Certain
prior year amounts have been reclassified to conform to current year
classifications.
NOTE B - ACCOUNTING AND DISCLOSURE CHANGES
In June, 1997, the Financial Accounting Standards Board ("FASB")
issued Statement 131, "Disclosures About Segments of an Enterprise and Related
Information." This Statement changes the way that segment information is defined
and reported in annual and interim financial statements. Statement 131 is
effective for fiscal years beginning after December 15, 1997, although segment
information is not required to be reported in interim financial statements in
1998. Management is evaluating the new Statement and has not determined what
effect it may have on future disclosures.
In February, 1998, the FASB issued Statement 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," effective for
fiscal years beginning after December 15, 1997. The objective of this Statement
is to improve and standardize disclosures about pensions and other
postretirement benefits and does not change the measurement or recognition of
pensions or other postretirement benefits.
5
In June, 1998, the FASB issued Statement 133, "Accounting for
Derivative Instruments and for Hedging Activities," effective for fiscal years
beginning after June 15, 1999. This Statement provides comprehensive and
consistent standards for the recognition and measurement of derivatives and
hedging activities. The Company does not expect compliance with the Statement to
have a material impact on the Company's consolidated financial statements.
In March, 1998, the Accounting Standards Executive Committee
("AcSEC") of the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," effective for fiscal years
beginning after December 15, 1998. The Statement is intended to eliminate the
diversity in practice in accounting for internal-use software costs and improve
financial reporting. The Company does not expect compliance with the Statement
to have a material impact on the Company's consolidated financial statements.
In April, 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of
Start-up Activities," effective for fiscal years beginning after December 15,
1998, which requires such costs to be expensed as incurred. The Company does not
expect compliance with the Statement to have a material impact on the Company's
consolidated financial statements.
In July, 1998, the Emerging Issues Task Force ("EITF") of the FASB
reached consensus on Issue No. 97-14, "Accounting for Deferred Compensation
Arrangements where Amounts Earned Are Held in a Rabbi Trust and Invested." The
objective of the Issue is to consolidate the accounts of Rabbi trusts with the
accounts of the Company, and to establish uniform recognition of related
compensation cost. Compliance with the standard set forth in the Issue, adopted
by the Company at September 30, 1998, had no material effect on the Company's
consolidated financial statements.
NOTE C - ENVIRONMENTAL RESERVES
The Company has a formal code of environmental conduct which promotes
environmental protection and restoration. The Company's obligations for known
environmental problems at active mining operations, idle and closed mining
operations and other sites have been recognized based on estimates of the cost
of investigation and remediation at each site. If the cost can only be estimated
as a range of possible amounts with no specific amount being most likely, the
minimum of the range is accrued in accordance with generally accepted accounting
principles. Estimates may change as additional information becomes available.
Actual costs incurred may vary from the estimates due to the inherent
uncertainties involved. Any potential insurance recoveries have not been
reflected in the determination of the financial reserves.
At September 30, 1998, the Company had an environmental reserve,
including its share of the environmental obligations of associated companies, of
$22.1 million, of which $3.5 million is a current liability. The reserve
includes the Company's obligations related to Federal and State Superfund and
Clean Water Act sites where the Company
6
is named as a potentially responsible party, including Cliffs-Dow and Kipling
sites in Michigan and the Rio Tinto mine site in Nevada, all of which sites are
independent of the Company's iron mining operations. The reserves are based on
engineering studies prepared by outside consultants engaged by the potentially
responsible parties. The Company continues to evaluate the recommendations of
the studies and other means for site clean-up. Significant site clean-up
activities have taken place at Rio Tinto and Cliffs-Dow. The City of Marquette,
Michigan purchased the Cliffs-Dow plant site, on January 29, 1998, from the
Company and has agreed to assume any future environmental responsibilities with
respect to that site. Also, included in the reserve are wholly-owned active and
idle operations, and other sites, including former operations, for which
reserves are based on the Company's estimated cost of investigation and
remediation of sites where expenditures may be incurred.
NOTE D - COMPREHENSIVE INCOME
Comprehensive Income includes Net Income and Other Comprehensive
Income, net of tax, consisting of unrealized gains (losses) on securities,
foreign currency translation adjustments and minimum pension liability.
Components of Comprehensive Income include:
(In Millions)
-------------------------------------------------------
Third Quarter First Nine Months
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net Income $ 20.1 $ 21.1 $ 37.5 $ 37.0
Other Comprehensive Income -
Unrealized Gain (Loss)
on Securities (1.9) (.8) (2.1) .5
Foreign Currency
Translation Adjustment -- (.2) -- --
---------- ---------- ---------- ----------
Comprehensive Income $ 18.2 $ 20.1 $ 35.4 $ 37.5
========== ========== ========== ==========
NOTE E - ACME BANKRUPTCY
On September 28, 1998, Acme Metals Incorporated and its wholly owned
subsidiary Acme Steel Company (collectively "Acme"), a partner in the
Company's-managed Wabush Mine in Canada and an iron ore customer, petitioned for
protection under Chapter 11 of the U.S. Bankruptcy Code. At the time of the
filing, the Company had a $1.2 million trade receivable from Acme. In
recognition of growing concerns about steel industry conditions, a $1.2 million
charge ($.9 million after-tax) was recorded in September, to raise the total
reserve for trade receivables to $2.2 million. Since its filing, Acme has
maintained operations with debtor-in-possession financing and has continued its
relationship with the Company. Sales to Acme in the first nine months of 1998
and for the year 1997 represented less than 5 percent of total sales volume.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATIONS
---------------------
COMPARISON OF THIRD QUARTER AND FIRST NINE MONTHS - 1998 AND 1997
-----------------------------------------------------------------
Earnings for the third quarter of 1998 were $20.1 million, or $1.78 per
diluted share (all per share earnings are "diluted earnings per share" unless
otherwise stated), and first nine months earnings were $37.5 million, or $3.30
per share. Comparable earnings, before special items, in 1997 were $15.5
million, or $1.36 per share, in the third quarter, and $28.6 million, or $2.50
per share, in the first nine months. Net income for the first nine months of
1997 included a $5.6 million special tax credit recorded in the third quarter
and a $2.8 million after-tax second quarter reversal of an excess accrual for
closedown obligations of the Savage River Mine in Australia. Including the
special items, 1997 net income was $21.1 million, or $1.85 per share, in the
third quarter and $37.0 million, or $3.24 per share, for the first nine months.
Following is a summary of results:
(In Millions, Except Per Share)
----------------------------------------------------
Third Quarter First Nine Months
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Income Before Special Items:
Amount $ 20.1 $ 15.5 $ 37.5 $ 28.6
Per Share 1.78 1.36 3.30 2.50
Special Items:
Amount -- 5.6 -- 8.4
Per Share -- .49 -- .74
Net Income:
Amount 20.1 21.1 37.5 37.0
Per Share 1.78 1.85 3.30 3.24
The $4.6 million, or 30 percent, increase in third quarter earnings,
before special items, was mainly due to higher North American sales volume and
price realization, increased royalties and management fees, decreased
administrative expenses, a lower effective income tax rate and decreased
interest expense. Partly offsetting were higher ferrous metallics and
international development expenses and an increase in the reserve for accounts
receivable.
The $8.9 million, or 31 percent, increase in nine-month earnings,
before special items, was principally due to higher North American sales volume
and price realization, increased royalties and management fees, decreased
interest expense and a lower effective income tax rate. Partly offsetting were
higher ferrous metallics and international development expenses and
non-recurring 1997 Savage River earnings. Savage River, which produced its last
iron ore pellets in December, 1996, earned $2.9 million in the first nine months
of 1997 on sales of its remaining inventory.
8
The Company's North American iron ore pellet sales in the third quarter
of 1998 were a record 4.4 million tons, a 26 percent increase from the 3.5
million tons sold in the third quarter of 1997. Sales of 9.0 million tons in the
first nine months of 1998 were also a record and 36 percent higher than the 6.6
million tons sold in the first nine months of 1997.
Administrative expenses decreased by $2.0 million in the third quarter
of 1998 versus 1997 principally due to the lower cost of Performance Share
grants, a key component of senior management compensation. Lower interest
expense in the third quarter and first nine months resulted from increased
capitalization of interest on the Company's share of construction costs of the
Cliffs and Associates Limited ("CAL") reduced iron project in Trinidad and
Tobago. Other expenses were higher in both periods due to increased costs of
ferrous metallics and international development activities and the $1.2 million
pre-tax increase in the reserve for accounts receivable relating to the Acme
bankruptcy filing (See - Note E).
The effective income tax rate for the three and nine months ended
September 30, 1998 was 26 percent compared to 33 percent in the comparable prior
period before the 1997 special tax credit. The decrease in the 1998 tax rate was
due to lower foreign taxes and greater benefit of percentage depletion.
The Company-managed mines produced 10.8 million tons of iron ore
pellets in the third quarter of 1998 compared with 10.0 million tons in 1997.
Nine-month production was 30.2 million tons in 1998, up from 29.2 million tons
in 1997.
LIQUIDITY
- ---------
At September 30, 1998, the Company had cash and cash equivalents of
$115.5 million. Since December 31, 1997, cash and cash equivalents have
decreased $.4 million, primarily due to project investments and capital
expenditures, $37.7 million, dividends, $12.1 million, and repurchases of common
shares, $11.5 million, partially offset by cash flow from operations, $57.2
million, and decreased working capital, $2.4 million. The decrease in working
capital was primarily due to lower inventories and trade receivables partially
offset by lower payables and accrued liabilities.
For the year 1998 capital expenditures, principally for mining ventures
and including items classified as capital leases, are projected to total $133
million (Company's share - $62 million).
CAPITALIZATION
- --------------
Long-term debt of the Company consists of $70.0 million of senior
unsecured notes payable to an insurance company group. The notes bear a fixed
interest rate of 7.0 percent and are scheduled to be repaid with a single
principal payment in December, 2005. In the second quarter, the Company extended
the maturity of its $100 million revolving credit agreement from March 1, 2002
to May 31, 2003.
9
No borrowings are outstanding under this agreement. The Company was in
compliance with all financial covenants and restrictions of the agreements.
The fair value of the Company's long-term debt (which had a carrying
value of $70.0 million) at September 30, 1998, was estimated at $74.1 million
based on a discounted cash flow analysis and estimates of current borrowing
rates.
Following is a summary of common shares outstanding:
1998 1997 1996
--------------- --------------- ---------------
March 31 11,344,605 11,377,322 11,832,767
June 30 11,322,047 11,374,448 11,614,517
September 30 11,148,453 11,379,357 11,367,717
December 31 11,308,914 11,369,717
During the third quarter of 1998, the Company repurchased 177,100
shares of its common stock at a total cost of $8.3 million. Since the inception
of the stock repurchase program in 1995, 1,130,500 shares have been repurchased
at a total cost of $46.7 million.
FERROUS METALLICS ACTIVITIES
CLIFFS AND ASSOCIATES LIMITED - Construction at the hot-briquetted iron venture
project in Trinidad and Tobago with affiliates of LTV Corporation and Lurgi AG
has been progressing well and completion is expected by the end of the year. The
plant is expected to start up in the first quarter of 1999 and achieve its
design capacity rate of 500,000 metric tons per year in mid-1999. Demand for and
market prices of ferrous metallics products in North America continue to
deteriorate in large part due to the availability of substantial quantities of
low-priced imported pig iron.
NORTHSHORE "REDSMELT" PIG IRON PROJECT - The Company continues to evaluate an
investment in a plant at the Company's wholly-owned Northshore Mine in Minnesota
that would produce 700,000 metric tons annually of a premium grade pig iron.
While progress has been made in a number of areas, uncertainty over state
environmental permitting and market conditions has postponed a decision on the
project.
The Company continues to consider other investment alternatives, both
domestically and internationally, in the iron ore and ferrous metallics
business.
COAL RETIREES
- -------------
Through June 30, 1998, payments covering over 300 beneficiaries have
been made to the UMWA Combined Benefit Fund as required by the Coal Industry
Retiree Health Benefit Act of 1992 ("Act"). Over 20 percent of these
beneficiaries are from former coal operations which ceased operations as
signatories to the UMWA contract prior to when coal wage agreements contained
any provisions that could be construed
10
as promising or implying that health benefits would be provided for life. Based
on a recent U.S. Supreme Court decision in EASTERN ENTERPRISES V. APFEL, premium
payments on these beneficiaries have been discontinued subsequent to June 30,
1998 and a refund requested for previous payments. Although the Act provides for
substantial penalties for non-payment of premiums, management believes that the
Company's actions, in light of EASTERN ENTERPRISES V. APFEL, would not subject
the Company to such penalties. Payments covering the remaining beneficiaries
have continued. On October 16, the United States Court of Appeals denied an
appeal, which the Company had filed on constitutional grounds, relating to
assignments by the Trustees of the UMWA 1992 Benefit Plan of additional
beneficiaries related to two formerly operated joint venture coal mines. The
Company continues to make payments into an escrow account with respect to these
beneficiaries pending its decision whether to pursue a petition for certiorari
to the United States Supreme Court.
OUTLOOK
- -------
Steel production in the U.S. and Canada, which was strong through the
first half of 1998, declined significantly in the third quarter. Record levels
of low priced steel imports are adversely impacting order rates, capacity
utilization rates, shipment volumes and profits of the North America steel
industry. Steel inventories have increased, causing cutbacks in steel
production. In late September, steel producers in the U.S. and Canada filed
complaints against foreign competitors for unfair trade practices. While the
filings should benefit the steelmakers, the outlook for the remainder of 1998
and some part of 1999 is for import penetration to continue at a relatively high
level, causing steel demand to remain slow and steel prices weak.
As a result of deteriorating conditions in the North American steel
industry, the Company's full year 1998 sales are projected to be lower than
previously estimated, and are expected to be between 12.0 and 12.5 million tons.
Fourth quarter 1998 sales will be lower than the 3.8 million tons sold in the
fourth quarter of 1997. It is anticipated that the Company's 1999 sales volume
will be less than 1998 sales.
For the full year 1998, the six Company-managed mines are expected to
produce a record 40.3 million tons, with the Company's share being 11.5 million
tons. The increases in 1998 are mainly due to higher production at the Tilden
Mine. The Company-managed mines are currently planning to start the year 1999
operating at capacity levels; however, production levels can be reduced during
the year. Reflecting the difficult business environment, the Company and the
managed mines are reviewing cost reduction initiatives.
YEAR 2000 TECHNOLOGY
- --------------------
Year 2000 compliance is a major business priority of the Company and is
presently being addressed throughout all of its operations. A company-wide Year
2000 Compliance Program ("Compliance Program") has been established with a
dedicated team headed by a Project Executive, and composed of Internal Control,
Information Technology and Process Control representatives, including a
functional project leader
11
from each of the Company's operating ventures. Additionally, two outside
engineering firms and one information technology service firm have been engaged
to date to support and assist in process control compliance activities. The
status of the Compliance Program is reported regularly to the Year 2000
Compliance Steering Committee, consisting of the Chief Executive Officer and
other officers of the Company, and also to the Company's Board of Directors.
The Compliance Program has been divided into five phases: 1) inventory,
2) assessment, 3) renovation, 4) unit testing, and 5) system integration
testing. The Company has substantially completed the inventory and assessment
phases and expects to substantially complete renovation and unit testing by the
end of 1998, system integration testing scheduled to be completed by the third
quarter of 1999.
A substantial portion of Year 2000 information technology compliance
will be achieved as a result of the Company's Information Technology Plan ("IT
Plan"). The IT Plan, initiated in 1996, involves the implementation of a
purchased, mining-based, Year 2000 compliant, software suite to replace legacy
programs for operations and administrative mainframe systems servicing most
domestic locations. In addition to avoiding any potential Year 2000 problems,
the IT Plan will result in improved system and operating effectiveness. The IT
Plan is estimated to cost approximately $25 million for the Company and
associated ventures, $17 million of which is projected to be classified as
capital expenditures and $8 million charged to operations (Company's share $6.9
million total; $4.6 million capital, $2.3 million operating). Since
implementation and through September 30, 1998, $10.0 million (Company's share -
$2.7 million) was expended with $3.0 million (Company's share $.8 million)
charged to operations as incurred. Project completion is expected in the third
quarter of 1999. The Company is charging to operations current state assessment,
process re-engineering, and training costs associated with the IT Plan. For
legacy programs and locations not included in the IT Plan, modifications and/or
replacement of existing programs are underway for achieving Year 2000 compliance
with an expected cost of less than $1 million.
In addition to addressing software legacy program issues, the Year 2000
Compliance Program is addressing the impact of the date change with respect to
the Company's mainframe computer system, technical infrastructure, end-user
computing, process control systems, and environmental and safety monitoring,
security and access systems. Emphasis has been placed on those systems which
affect production, quality or safety.
The Company has also included investigation of major suppliers' and
customers' Year 2000 readiness as part of the program. Major suppliers and
customers of the Company have been requested to complete a Year 2000 compliance
questionnaire. For those which the Company considers critical to its operations,
on site verifications will be performed as required. Interruption of electrical
power supplied to the Company's operating locations has been identified as
having the greatest potential adverse impact. Failure of electric power
suppliers of the Company's iron ore operations to become Year 2000 compliant
could cause power interruptions resulting in significant production
12
losses and potential equipment damage. The Company's wholly owned Northshore and
managed LTV Steel Mining Company mines are equipped with electric power
generation facilities capable of providing nearly all of their power
requirements.
The incremental expense of achieving Year 2000 compliance on systems
not covered by the IT Plan and other software legacy programs is estimated to be
$2 million for the Company and its ventures. Completion of this program is
targeted for mid-1999. The Company has completed internal audits at various
operations to verify that progress is on schedule toward completion of the Year
2000 Compliance Program.
The Company is developing contingency plans for internally controlled
operations and business systems. Efforts continue to extend contingency plans to
cover the failure of key suppliers to achieve Year 2000 compliance; however,
comprehensive coverage cannot be assured.
The Company expects to be Year 2000 compliant; however, statements with
regard to such expectations are subject to various risk factors which may
materially affect the Company's Year 2000 compliance efforts. These risk factors
include the availability of trained personnel, the ability to detect, locate and
correct system codes, the evaluation of the wide variety of IT software and
hardware, failure of software vendors to deliver upgrades or make repairs as
promised, and failure of key vendors to become compliant. Although the Company
has taken actions which it believes are appropriate and reasonable to determine
the readiness of third parties, it must in part rely on representations made by
third parties. The Company is attempting to reduce these risks and others by
utilizing an organized approach, conducting audits and extensive testing,
identifying alternative sources of supply and other contingency plans.
FORWARD-LOOKING STATEMENTS
- --------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. In addition to historical information,
this report contains forward-looking statements that are subject to risks and
uncertainties that could cause future results to differ materially from expected
results. Such statements are based on management's beliefs and assumptions made
on information currently available to it.
The Company's primary business is the production and sale of iron ore
pellets, which is subject to the cyclical nature of the integrated steel
industry. Factors that could cause the Company's actual results to be materially
different from projected results include the following:
- Changes in the financial condition of integrated steel company
partners and customers. The potential financial failure and
shutdown of one or more significant customers or partners without
mitigation could represent a significant adverse development;
- Substantial changes in imports of steel or iron ore;
13
- Domestic or international economic and political conditions;
- Unanticipated geological conditions or ore processing changes;
- Development of alternative steel-making technologies;
- Displacement of integrated steel production by electric furnace
production;
- Displacement of steel by competitive materials;
- Energy costs and availability;
- Shortage of available process water due to drought;
- Difficulties or delays in achieving Year 2000 compliance;
- Major equipment failure, availability, and magnitude and duration
of repairs;
- Labor contract negotiations;
- Changes in tax laws directly affecting mineral exploration and
development;
- Changes in laws, regulations or enforcement practices governing
environmental site remediation requirements and the technology
available to complete required remediation. Additionally, the
impact of inflation, the identification and financial condition
of other responsible parties, as well as the number of sites and
quantity and type of material to be removed, may significantly
affect estimated environmental remediation liabilities;
- Changes in laws, regulations or enforcement practices governing
compliance with environmental and safety standards at operating
locations; and,
- Accounting principle or policy changes by the Financial
Accounting Standards Board or the Securities and Exchange
Commission.
Additionally, the Company's projection of construction cost, start-up
date, production rate and operations for the Trinidad reduced iron project could
change due to the following inherent uncertainties:
- Construction delays;
- Changes in product pricing and demand;
- Process difficulties; and
- Cost and availability of key components of production.
14
The Company is under no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
15
PART II - OTHER INFORMATION
Item 5. Other Information
- -------------------------
Shareholder Proposals - Deadline for Inclusion in Proxy Materials
-----------------------------------------------------------------
As set forth in the Company's Proxy Statement for the 1998 Annual
Meeting of Shareholders, any proposal by a shareholder of the Company intended
to be presented at the 1999 Annual Meeting of Shareholders must be received by
the Company on or before November 23, 1998 to be included in the proxy materials
of the Company relating to such meeting.
Shareholder Proposals - Discretionary Voting of Proxies
-------------------------------------------------------
In accordance with recent amendments to Rule 14a-4 under the Securities
Exchange Act of 1934, if notice of a proposal by a shareholder of the Company
intended to be presented at the 1999 Annual Meeting of Shareholders is received
by the Company after February 6, 1999, the persons authorized under the
Company's management proxies may exercise discretionary authority to vote or act
on such proposal if the proposal is raised at the 1999 Annual Meeting of
Shareholders.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) List of Exhibits - Refer to Exhibit Index on page 17.
(b) There were no reports on Form 8-K filed during the three months
ended September 30, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CLEVELAND-CLIFFS INC
Date November 5, 1998 By /s/ C. B. Bezik
-------------------------- -----------------------------------
C. B. Bezik
Senior Vice President-Finance and
Principal Financial Officer
16
EXHIBIT INDEX
-------------
Exhibit
Number Exhibit
------ --------------------------------------------------- -------------------
10(a) Retirement and Consulting Agreement, dated as of Filed
September 2, 1998, by and between Cleveland-Cliffs Herewith
Inc and M. Thomas Moore
27 Consolidated Financial Data Schedule submitted for
Securities and Exchange Commission information
only:
27.1 September 30, 1998 --
27.2 September 30, 1997 --
99(a) Cleveland-Cliffs Inc News Release published on Filed
September 29, 1998, with respect to the Chapter 11 Herewith
bankruptcy filing by Acme Metals Incorporated
99(b) Cleveland-Cliffs Inc News Release published on Filed
October 21, 1998, with respect to 1998 third quarter Herewith
earnings and 1998 first nine months.
17